Twitter IPO as Economical as Its Tweets With 27% Discount

A user checks a Twitter feed on the screen of an Apple Inc. iPhone 5 smartphone in London. Twitter plans to sell 70 million shares at $17 to $20 each in the initial public offering. Photographer: Chris Ratcliffe/Bloomberg

The San Francisco-based company is seeking a valuation of
9.5 times 2014 sales in its IPO next month, according to data
released in a filing with the Securities and Exchange Commission
yesterday and analyst projections compiled by Bloomberg. That’s
27 percent cheaper than the 12.9 times 2014 sales that Facebook
Inc. traded at as of yesterday, and 29 percent lower than
LinkedIn Corp.’s multiple of 13.4 times sales, the data show.

The discount Twitter is offering underscores how the six-year-old short-messaging site is working to avoid the fate of
Facebook, Groupon Inc. and Zynga Inc., which all lost more than
half of their value within six months of their initial
offerings. Twitter Chief Executive Officer Dick Costolo has
taken a different tack from the start, first by filing
confidentially to go public to avoid the hype that drove up
Facebook’s pre-IPO valuation, and now by pricing the company
more modestly than some of its Internet peers. The moves have
left Twitter positioned to capitalize on a revival in investor
appetite for social-media stocks.

“It’s fair to say they’re learning from Facebook’s
mistakes,” said Michael Scanlon, managing director at Manulife
Asset Management in Boston, who helps manage $3 billion. “It’s
hard to imagine this deal isn’t oversubscribed and then they’ll
have to gauge what they think the opportunity is to increase the
price.”

$10.9 Billion

Twitter is planning to sell 70 million shares -- or a 13
percent stake -- at $17 to $20 each to raise as much as $1.4
billion, according to a filing yesterday. The $10.9 billion
valuation at the top end of the range is based on the 544.7
million common shares outstanding after the IPO.

On a fully diluted basis, including restricted stock and
options, Twitter will have about 695.2 million shares
outstanding. By that measure, at the top end of the range
Twitter would be valued at $13.9 billion.

Twitter’s top shareholders are keeping their shares, and
after the offering co-founder Evan Williams will hold more than
a 10 percent stake, the filing shows. He’s the single-biggest
individual stockholder. Affiliates of Rizvi Traverse Management
LLC will hold almost a 16 percent stake valued at $1.7 billion.

Bullish Views

By hanging on to their stock, Twitter insiders are showing
they’re bullish about the company’s growth prospects, said
Robert Peck, an analyst with SunTrust Robinson Humphrey in New
York. Peck has a buy rating on Twitter and expects the stock to
rise to $50 by the end of 2014.

“You don’t see a big owner coming out and selling
everything,” Peck said in an interview. “That shows conviction
about the long-term prospects of the company.”

The sale would be the largest IPO for an Internet company
since Facebook debuted on the stock market in May 2012 and
raised $16 billion. At the time, Facebook was valued at $81.3
billion based on the number of its common shares, or $104
billion based on a fully diluted share count. The Menlo Park,
California-based company bumped up its offering price range to
$34 to $38 after initially seeking $28 to $35.

No Facebook

Facebook in its IPO was priced at 107 times trailing 12-month earnings on a fully diluted basis, making it more
expensive than 99 percent of all companies in the Standard &
Poor’s 500 Index at the time. The company quickly saw its stock
sink below its $38 debut price after its IPO, before finally
rallying to close above that level this August.

For Silicon Valley, a successful Twitter IPO will go a long
way toward erasing the aftertaste from Facebook’s sale, which
along with the poor stock market performances of Zynga and
Groupon shattered confidence in consumer Internet companies.

Following those offerings, venture capitalists and others
shifted investing dollars to technology businesses that sold
their products to other businesses, said Nihal Mehta, founder of
LocalResponse Inc. and venture capitalist at Eniac Ventures. Now
with Twitter’s debut and Facebook trading above its offering
price, confidence in consumer technology has revived.

“Twitter will help escalate all the other advertising-based consumer companies, and create potential for more to be
born,” Mehta said. “We’re seeing more consumer deals than we
ever have before.”

Risk Factors

While Twitter has more than doubled revenue annually, to
$534.4 million in the 12 months through Sept. 30, user growth is
slowing, filings show. The service had 231.7 million monthly
users in the three months through September, up 39 percent from
a year earlier. That compares with 65 percent growth in the
previous year.

Average revenue per user is less than half Facebook’s,
filings show, with Twitter’s RPU at 73 cents, based on sales of
$168.6 million in the third quarter, compared with Facebook’s
$1.60 average monthly revenue per user.

Losses have also widened. For the third quarter, Twitter
said its net loss expanded to $64.6 million from $21.6 million a
year earlier.

Twitter is making another 10.5 million shares available to
underwriters should they choose to exercise an option to buy
them. Existing investors may still register to sell shares
before the IPO, scheduled to price on Nov. 6, and employees who
aren’t executives will be eligible to sell almost 10 million
shares as early as Feb. 15. All stock held by executives and
directors is subject to a standard 180-day lockup period.

Twitter Stakeholders

Union Square Ventures, which invested in Twitter in 2007,
will have a stake valued at $557 million at the high end of the
price range, while a stake owned by Spark Capital will be worth
$648 million at that price. Benchmark Capital Partners LP has a
stake that would be valued at $631 million.

More than 50 individuals and institutions own shares
through direct purchases, secondary sales and acquisitions, and
hundreds more are invested through various funds. That includes
Richard Branson, the billionaire founder of Virgin Group and
Saudi Prince Alwaleed bin Talal, people with knowledge of the
matter have said.

Twitter will start meeting investors on Oct. 28, according
to a schedule obtained by Bloomberg. The company will hold
meetings in New York on Tuesday and Wednesday of next week,
Boston on Thursday, and Chicago on Friday. The following week it
will visit investors in San Francisco on Nov. 4, and Los Angeles
the next day, before ending up back in New York on Nov. 6, the
same day the final pricing of the shares is scheduled.

Twitter is expected to start trading on the New York Stock
Exchange the next day.

Costolo’s Message

Costolo and Chief Financial Officer Mike Gupta will lead
the meetings, according to a person with knowledge of the
matter, who asked not to be identified because the plans are
private. Costolo and Gupta are meeting today with IPO
underwriters Goldman Sachs Group Inc., Morgan Stanley and
JPMorgan Chase & Co. to practice their road-show presentation,
according to people with knowledge of the plans.

On the road show, Twitter, which has historically booked
net losses, will point toward an adjusted measure of earnings
before interest, taxes, depreciation and amortization to signal
its profitability, one of the people said. The adjusted Ebitda
excludes the effects of stock-based compensation and investments
in servers, leases and networking equipment to support the
company’s expansion, the company’s filing showed.

Adjusted Ebitda was $9.3 million in the quarter ended Sept.
30, compared with $2.9 million a year earlier.

Twitter also will describe the company as a conversational,
public, real-time and distributed platform, as was outlined in
its filings.

Spending Proceeds

With the money from the offering, Twitter may seek to
expand globally and prove it can draw advertisers to the
network. Advertisers can sponsor one of the service’s posts,
paying to have it show up on users’ feeds even if they don’t
follow the company.

Costolo is betting that the service’s popularity on mobile
phones will help lure advertisers. About three-fourths of
Twitter’s most active users accessed the service from mobile
devices in the three months through September, compared with 69
percent in the year-earlier period, according to the filing.
More than 70 percent of advertising revenue comes from those
devices, a higher proportion than Facebook’s.

With an IPO, Twitter is set to cap its journey as a
rudimentary site for short posts to a global megaphone for
celebrities, politicians, businesses and more. The service came
out of a failing startup from co-founder Williams called Odeo in
2006. Other co-founders include Biz Stone and Jack Dorsey, who
was CEO in Twitter’s early days and now runs Square Inc.

Icahn, Bieber

The company’s site has become a destination for users to
discuss everything from the finale of AMC series “Breaking
Bad” to the unfolding of terrorist attacks and revolutions.
Activist investor Carl Icahn used the platform to announce his
discussions with Apple Inc. CEO Tim Cook, moving the stock with
some updates. Pop star Justin Bieber, who has 45 million
followers, has said things like “You will know my words, my
heart #journals.”

Today there are more than 500 million posts, or tweets,
each day, compared with 2 million per day in January 2009, the
company has said.

Twitter will trade under the symbol TWTR on the New York
Stock Exchange. The choice of the NYSE may let Twitter avoid the
technical gaffes that plagued Facebook’s IPO last year on the
Nasdaq Stock Market. It also follows years of the exchange
trying to attract young technology companies away from its
rival. While it missed out on Facebook, the NYSE won LinkedIn
and Pandora Media Inc.’s IPOs in 2011.

Goldman Sachs is the lead underwriter of the IPO, joined by
Morgan Stanley, JPMorgan, Bank of America Corp., Deutsche Bank
AG, Allen & Co. and Code Advisors.